Informist, Tuesday, Jul 2, 2024

--Kotak Sec's Chainwala:Haven demand to support gold prices in Jul-Sep

--CONTEXT:Comments by Kotak Securities' Kaynat Chainwala in interview

--Kotak Sec's Chainwala: Silver may fall 10% if Fed rate cut delayed

--Kotak Sec's Chainwala: See WTI crude prices at $75-$90/bbl in 6 mos

By Anjali Lavania and Sandeep Sinha

MUMBAI – The bias for gold is likely to be positive in the September quarter, though breaching the all-time high of $2,464 per oz may be difficult, says Kaynat Chainwala, associate vice-president of commodity research at Kotak Securities.

"The escalating geopolitical tensions in West Asia and a war between Russia and Ukraine would provide a safe-haven advantage to gold," Chainwala tells Informist in an interview. "It (gold) would not really drift lower or see a sharp weakness, but a sharp upside to all-time highs does not really look likely in the near term.

"For gold prices to move higher and hit a new fresh lifetime high, we need to see a US interest rate cut. We might see gold prices actually approaching all-time highs, but that could happen somewhere in September or in the fourth quarter," Chainwala says. Currently, the market expects a rate cut at the Fed's September meeting, with swap markets pricing in an almost 57% possibility.

"I see that (rate cut) happening in the fourth quarter of this year, as we have a lot of events such as US presidential elections, which will bring a lot of uncertainty in the markets. A lot of volatility will be there, geopolitical tensions also...they have been running for too long, and there is chance of escalation, not de-escalation. So, that is also going to be a little positive for gold prices," she says.

The August gold contract on the COMEX was last at $2,337.80 an ounce.

SILVER

Asked about the prospects of silver, Chainwala says that in the near term, silver prices will be range-bound and the commodity will outperform gold only if economic activity in China shows signs of an improvement.

"On the stimulus side, I don't think, because they (authorities in China) have been announcing a lot of measures – direct real estate measures or fiscal stimulus. But they also have very limited room, considering that the yuan has been depreciating, and they have to defend their currency also. So, we cannot really expect any major measures as such," she says.

Of late, silver has benefitted from gold-buying and a rally in industrial metals. Also, base metal prices have hit multi-year highs, though they have eased from those levels since then, she says.

Chainwala does not expect a sharp sell-off in silver, and expects a range-bound market because of uncertainty around rate cuts by the Fed, as well as around China's economy. She also points to green shoots supporting both gold and silver prices. The September silver contract on the COMEX was last at $29.67 per ounce.

However, prices could retreat 5-10% in the next two-three months if US economic data remains resilient and Fed rate cuts are delayed further, she adds.

BASE METALS

Chainwala does not expect significant downside in copper prices because of very strong fundamentals – tightness in concentrate supply and demand from the electric vehicles industry – in the next few years. "The supply that is there is not actually enough supply to cater to electric vehicle demand. That is why we don't really see any extreme downside," she says.

While prices on the London Metal Exchange could drop to $9,300-$9,350 per tn, they are unlikely to breach $9,000/tn in the near term. On the other hand, if the Chinese economy fares well, they could approach $10,000/tn levels, she says. The three-month copper contract on LME was last at $9,636 per tn.

Copper demand from China is currently soft, with inventories at Shanghai Futures Exchange and LME at high levels and exports from China rising. Unless demand improves, prices won't pick up, Chainwala says.

In the case of aluminium, she expects further weakness as demand isn't picking up and production in China is already at a record high. For zinc, she says that fundamentals are positive due to tightness in supply.

DOLLAR, CRUDE

Chainwala expects the US dollar to remain strong, and sees room for further upside. The dollar index, which is near 106 levels, could move towards 106.5 in the coming sessions if more economic data complements it, she says, adding that even 107 is well possible.

She estimates West Texas Intermediate crude oil at $75-$90 per barrel in the next six months. "The output cut that OPEC (Organization of the Petroleum Exporting Countries) has announced has not really been very impactful on prices because we've seen that prices have come down from higher levels," she says.

For WTI prices to go towards $85-$90 per bbl, "we need to see continuous inventory withdrawals and a significant demand uptick," she says. However, markets would be watchful of OPEC's decision to restore or extend its output cuts from October, she adds.

"OPEC extending output cuts will be very difficult...They have subjected the markets to sharp oil output cuts despite some members' reluctance because their capacity is increasing, but they are forced to go for output cuts. I think UAE has a lot of spare capacity."

As of now, it boils down to the US and China, she says. "Currently, we are in the US summer driving season, which is a peak demand season for crude oil and products. So, even then, we are not actually seeing a very significant uptick in prices."

The price of WTI crude was last at $83.46 per bbl. End

US$1 = 83.51 rupees

Edited by Avishek Dutta

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